Novice Investing - AOL, You got lots of mails

Date: Monday 01st 2008f December 2008 04:20:41 PM

AOL, You got lots of mails - 10/14/2005

By: Novice Investing Staff

We heard it in the media nowadays. Suddenly, everyone is interested in AOL (America Online). First, it was Microsoft, trying to merge its msn division with AOL. Reportedly, they are discussing ways to spin off the entity and do an IPO.

A week ago, it was Google and Comcast trying to buy stake in AOL. For Google, the move made sense since AOL accounts for 12% of Google revenue ($ 300 M ). While Google only keeps 20% of that revenue, it wants to prevent Microsoft from getting that piece of pie. For Comcast, well, we suspect that Comcast was trying to convert AOL's 20 million dial-up customers into broadband. If half of it goes to Comcast, imagine how much additional revenue it will get. Well, let us break it down for you. 10 million subscriber at $ 30 a piece every month? You get $ 300 Million monthly revenue or $ 3.6 Billion additional yearly revenue. Comcast revenue figure for fiscal year 2004 is $ 20.3 Billion. So, with what swoop of a move, it will increase revenue by 18%. Nice move.

Is the game over? No, AOL. You still got mail. This time, it is Yahoo! who knocks and gives AOL a visit. Yahoo! reportedly was in talk with AOL for a stake in its business. There is no surprise here. Yahoo! was # 2 in search engine behind Google. Having AOL's 20 million customers on its side will help Yahoo! overtake Google in the search race.

How much is AOL worth? We do not research AOL previously but let's give it a shot, shall we? AOL has 20 million subscribers, which pay $20 a month for the access of a dial up internet connection. This translates into $ 4.8 Billion of annual revenue. Add in $ 300 M in advertising revenue that the subscribers generate, AOL has $ 5.1 Billion of revenue. This is a recurring cash flow assuming customers will need internet connection for the foreseeable future. Applying a simple multiple of 2 times revenue, you get $ 10.2 Billion figure for AOL. But we believe that AOL might be worth more than that to potential suitors due to the possibility of offering more services other than dial-up connections. The battle has just begun. We will see who would win. At that time, we will check back and see what AOL price tag is.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation for AOL (American Online) or any other securities.

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